Why have new cars become so expensive?

The price of some of Ireland’s most popular cars has ballooned by more than €10,000 in the past decade, as the average price paid for a new car has risen above €33,000.

The average price paid figure is, in part, a reflection of the fact that we're now buying bigger and bigger vehicles. Today, the top 10 best-sellers' list is dominated by midsize SUVs such as the Hyundai Tucson and Toyota RAV4, when back in 2012 we were buying more compact hatchbacks and saloons.

Nonetheless, the up-front costs of a new car have increased as well, and in some cases have increased dramatically. Take the Volkswagen Golf, which not so very long ago was Ireland’s best-selling car. Back in 2012, the cheapest version of the Golf came with an 85hp 1.2-litre turbocharged petrol engine, had three doors, and cost €19,745.

Wander into a VW dealership today and ask for the cheapest Golf they have, and you’ll be looking at a price of €30,950 for a 1.0-litre TSI Life model. That’s a price increase of €11,205.

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It's pretty much the same wherever you look. Across a representative sample of popular models, we found that the 2022 Hyundai Tucson is €9,600 more expensive than a 2012 Hyundai ix35; a 2022 Ford Fiesta is €4,461 more expensive than its 2012 predecessor; a BMW 3 Series now costs €8,525 more to buy than it did in 2012; an Audi A6 is a whopping €14,380 more expensive; and even the humble Kia Picanto has gone up by €3,405.

The biggest increase of the sample we took was for buyers of the Mercedes-Benz S-Class – the current most affordable S-Class is €45,155 more expensive than the 2012 equivalent. Perhaps an S-Class buyer can afford such an increase, but it's pretty whopping all the same.

Vehicle registration tax

Why have new cars become so much more expensive? After all, taking the Golf as an example once again, the cost of a basic new Golf would have bought you a well-specified Passat in 2012. Some of it comes from tax changes, of course. The alterations in how vehicle registration tax is calculated have triggered significant increases in price, even though such changes were promised to be broadly ‘revenue-neutral’.

Luxury items are only part of the equation, although there’s no question that it’s a big part. The current Golf Life comes, as standard, with a 10-inch touchscreen infotainment system, a digital instrument screen, wireless smartphone connections, radar-guided cruise control, LED headlights, rain-sensing windscreen wipers, ambient lighting for the cabin, and ‘walk-up’ lighting for the outside. Such items would all have been costly optional extras for the 2012 Golf, if indeed they had been available at all.

The real driver of increased prices, at least until recent months, has been safety. Let’s stick with the Golf and look at the list of standard safety equipment.

Electronic stability control, automated emergency braking that detects if someone steps into the road in front of you, ‘Car-to-X’ communication that allows a car to receive danger warnings from other cars and from roadside beacons, a built-in emergency calling system that rings for an ambulance automatically if it detects that the car’s airbags have deployed, steering that keeps you straight in your lane (and which helps you swerve away from danger if needed), driver fatigue detection and a system that reads road signs and speed limits and flashes up warnings on the dashboard.

That’s a list that would not only have been colossally expensive in 2012, but some of it actually hadn’t even been invented then.

Some of the safety equipment has been added as part of legislation (the emergency e-call system most notably) while others are now included so that the car can receive a healthy rating from the independent crash test experts at Euro NCAP.

While increasing safety ought really to be immutably a good thing, it’s not necessarily the case. Take the automated emergency braking systems that are supposed to slam on the anchors if they pick up a car, person or cyclist in front of you that you haven’t noticed.

In a test of such systems in 2019, the American Automobile Association found that most were "completely ineffective" at night, which is exactly when most pedestrian deaths occur.

Since then, many manufacturers have added improved night-time detection sensors, but in many cases these upgrades are on the options list, and not fitted as standard. There’s another, psychological, effect which may be at work.

David Zipper, a visiting fellow at the Harvard Kennedy School's Taubman Center for State and Local Government, wrote: "Counterintuitively, some speculate that safer cars make streets more hazardous for pedestrians and cyclists, because drivers – secure in their increasingly impregnable machines – are more likely to take risks."

There is some statistical evidence for this – back in 1975, Chicago Booth economics professor emeritus Sam Peltzman studied data from 1966, when seatbelts became mandatory equipment in American cars for the first time, and found: "The regulation had provoked an offsetting behavioural response. When we held other factors constant, the 1966 regulations caused more accidents; but the accidents tended to be less harmful, so the net number of driver fatalities was unaffected."

There are now concerns that increases in safety equipment are leading to more in-car distraction. It’s possibly no co-incidence that as safety features have increased and improved, so too has the size of in-car touchscreens.

The ne plus ultra of this trend is fully autonomous cars, which remove the human from the driving altogether and leave us sitting behind a screen in a moving vehicle, where we can be sold things. Not all manufacturers are following this trend, it should be noted.

"Doing our research, when a driver would reach towards a touchscreen interface in any vehicle, they would unintentionally apply torque to the steering wheel, and the vehicle would drift out of its lane position," said Matthew Valbuena, Mazda North America's lead engineer for its infotainment systems. "And of course with a touchscreen you have to be looking at the screen while you're touching. so for that reason we were comfortable removing the touchscreen functionality."

Raw materials

Beyond the safety debate, there's the sheer cost of raw materials, which has spiked noticeably in the past two years. The twin effects of Covid and the Russian invasion of Ukraine have cause chaos in the delicately-balanced supply chains used by car makers, and when that happens, costs go up. US-based electric car maker Rivian recently found itself in consumer hot water when it jacked up the prices of it models by as much as €10,000. "The costs of the components and materials that go into building our vehicles have risen considerably," said Rivian's founder and chief executive, RJ Scaringe.

A survey carried out in 2021 by KPMG asked senior motor industry executives about their hopes, fears and ambitions for the future, and the number-one fear was anxiety about the supply chain. "They expressed high levels of concern about the near-term availability and price of both commodities and labour. Almost half (46 per cent) are very or extremely concerned about the impact of the recent commodity-price volatility on their business in the next year," said the KPMG report, and that was issued before the horror of the war against Ukraine.

There's also an increasing cost in terms of labour. "Just think about it – there can be up to 30,000 parts in a car like a Ford Fiesta," John Manning, market lead for Ford Ireland, told The Irish Times. "Each one of those items has a cost and each of those costs are subject to inflation. Labour is also a huge part of the cost, not just the Ford factory labour but the labour involved in producing every one of those 30,000 parts."

The ripples and waves triggered in global employment by Covid have also affected the car industry, which is suffering many of the same crises of recruitment that have been seen in other areas. Fifty-five percent of executives are very or extremely concerned about labour shortages, according to KPMG.

Energy costs

Energy prices also have an impact. While most carmakers are moving towards a carbon-neutral energy supply for their factories, those targets are often some years away, and right now most plants rely on gas and electricity for their energy supply, so the same increases that are causing inflation to spike upwards for consumers will affect car manufacture too. And that price will be passed on.

Finally, though, is there simply some old-fashioned price gouging going on? Are carmakers jacking up prices simply because, with so much else going on, they can?

Not according to David Bannon from Mazda Ireland. "Over the last 10 years we've increased the price of our cars but not without significantly improving the quality and safety of our vehicles," Bannon said.

“Mazda3 and Mazda CX-30 both received the highest result for adult occupant safety in the Euro NCAP ratings when they were launched three years ago.The current lowest grade (GS) Mazda3 comes with LED headlights, radar-guided cruise control, projected heads-up display, parking sensors and a suite of advanced safety equipment – spec that you would expect to see on only the top grades of premium brands not that long ago.

“That GS grade is €29,195, while 10 years ago the Mazda3 started at €21,695. While €7,500 may seem like a significant jump, the car today is in a different league of quality, spec, safety and engine efficiency to the car of 10 years ago. And that is with the addition of emission penalties within the price.”